The CRR is the rate of the money the banks used to keep with the RBI for security without any interest. How it will impact the banks profitability! for example if bank A collects 10000/- deposit from you then out of the 10000/- he has to keep Rs 500 at the rate of 5% with the RBI. The net amount left with the bank will be 9500/- . if the CRR is getting hiked then RBI will suck the money from the system in order to meet the trade deficit. Same time the bank will have money supply deficit to meet all the loan demand. Once the money supply will be reduced then the loan rates or lending rates will increase. 80% of the banks lending will be short term trade loan which used to settle on fourth night basis.
The increase in interest rate will directly impact the housing, experts, banks, automobile sell figure etc in the short term. Since market is more sensitive towards the short term reactions it can lead to the fall in the above sectors. The real jerk will be felt in the monthly sell figure and turnover of the above mentioned sectors. Continuous increase in the CRR may impact the quarterly profitability of the above sectors. Second point is if it is inline with the increase in the interest rate in the cash deposits then it will directly impact the stock market since the big money will flow out from the high risk sector to the low risk sector resulting low participation in the market.
What one trader should do in this junction? The key strategy need to be followed in this junction is “Reduce risk mechanism”.
1. The key reaction to this kind of move by the central bank will increase the volatility and huge swing in the market.
2.One should not be panic in this market
3. Though this region is enough for a good correction but we traders need to be very much alert to make money from speculation.
4. Swing trade is a best idea for the day traders in this junction.
5. For F&O trades please do avoid futures and adopt low risk option.
6. One can buy immediate out of money call option in script and immediate out of money put in index for best result.
7.Always our favorite is to form a 4/2 call spread and 2/1 put spread in this junction one need to follow the technical very carefully before initiating this.
TRADE WITH CAUTION